Today was an important day for the UK, as traders have been waiting to see the actual health of the country’s economy, given the fact that the country is suffering from threats of recession. The inflation data that was released recently made traders worried that inflation has taken a wrong turn again, and that the Bank of England has been pushed into a corner with respect to its monetary policy. However, the U.S. retail sales data had eased some of those concerns, as one thing is for certain: keeping the interest rate at its current level will only make matters worse for the UK economy.
Background
The Bank of England has left no stone unturned in fighting inflation, and it has increased the interest rate at a record pace in the hope that it will slow down inflation in the country, which has the whole country struggling with a cost of living crisis. The Bank of England increased interest rates 14 times, and all of them have been back-to-back. Only recently has it kept the interest rates at their current level of 5.25%. Inflation in the country, which was running in the double digits, did drop to a level where it started to flirt with the level of 3.9%, which made the Bank of England and consumers a lot more comfortable and gave them hopes that perhaps now the Bank of England will take a U-turn.
However, the fresh reading this month showed that inflation has taken a wrong turn, as the data printed a number of 4% against the forecast of 3.8%, while the previous number was at 3.9%. In November 2022, the inflation rate was 11.1%. The Bank of England’s target has been 2%.
The fresh reading of inflation increased expectations that the Bank of England is likely to hold interest rates at their current level for a longer period of time, or perhaps there could actually be another interest rate hike. Traders were worried that it would make matters worse in the country as higher inflation is eating into the country’s growth; however, there was this hope that consumer spending has been somewhat better than expected, and this means that the bank could perhaps afford to keep running things in its way. But clearly, that is not the case.
The threat is real
Today, we had the consumer health check data known as the UK retail sales data. The number was shocking, to say the least. The actual number came in at -3.2% against the forecast of -0.5%, while the previous reading was at 1.4%, which at the time gave traders confidence that consumers weren’t actually in dire straits. However, all of that has changed today. December's data has made traders worried that the UK’s economy in the second half of 2023 may have actually contracted. The data released today was the largest monthly fall since January 2021, when pandemic fears were at their peak and hitting the economy at all ends.
The reaction
The UK’s FTSE 100 has been in a downtrend, and intense selling pressure has seen some buyers coming back into the market as they understand that the Bank of England will not be able to hold the rates at their current level, which means they will have to lower the interest rate either by choice or being under pressure. For traders, rates need to come down; otherwise, the UK’s economy is going to suffer even more losses and consumer confidence will fall further.
Nonetheless, despite the subdued buying activity today, the FTSE 100 is certainly on track to post another week of losses, and if it closes in negative territory, it would mark the index's third week of losses. Speaking from a technical perspective, it seems like the index has a lot more room to go in terms of this selloff, and we may not see an actual turn until it hits the support zone, shown on the chart below.
Chart by XTB
As for the sterling, that is also selling off on the back of the data, and this again shows us the same sentiment that traders are expecting an interest rate cut from the BOE. The support and resistance zones are shown on the chart below, and the GBP/USD is well on track to close the week in negative territory. It is highly possible that we may see further acceleration in this trend if the GDP data shows further weakness.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Naeem Aslam
I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.
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